With ‘neutral’ stance, RBI signals a prolonged pause despite inflation concerns: Economists explain why

The Reserve Bank of India's decision to keep the repo rate unchanged at 5.25% has reinforced expectations that the central bank is unlikely to raise interest rates anytime soon, with economists interpreting the Monetary Policy Committee's (MPC) latest guidance as a signal of an extended pause amid contained core inflation.

The MPC on Wednesday unanimously retained its "neutral" stance. It also revised its FY27 inflation forecast down by 10 basis points to 5% and raised the GDP growth projection by 10 basis points to 6.75%, indicating confidence in the economy while viewing recent inflation pressures as largely driven by food and fuel.

Anitha Rangan, Chief Economist at RBL Bank, said the RBI had opted to wait for "greater clarity on inflation effects" before recalibrating rates.

"RBI keeps policy rate (Repo) unchanged as expected at 5.25% in a unanimous decision and also keeps a stance at 'Neutral'. On the view that despite expected increase in headline inflation it is not expected to get broad based into core as it is driven by food and fuel, RBI kept policy rates unchanged," she said.

Rangan added that "the policy statement continues to suggest that RBI is willing to wait and watch and will adopt a more reactive approach with respect to policy rates."

She said that unless geopolitical risks worsen significantly, "RBI will remain more proactive on liquidity measures in October rather than rates," while the comfort on core inflation indicates the central bank is awaiting evidence of sustained second-round inflationary effects before acting.

Radhika Rao, Senior Economist and Executive Director at DBS Bank, said the RBI had struck a balanced tone by remaining patient without becoming complacent.

"The RBI signalled patience, but not complacency. By keeping the repo rate unchanged and retaining a neutral stance, the MPC has preserved flexibility while assessing whether recent inflation pressures remain temporary or evolve into a broader inflation cycle," she said.

She noted that the guidance was "less hawkish than anticipated", with the central bank acknowledging that pass-through from higher food and fuel prices remains limited.

Rao said DBS sees "limited scope for a rate hike at the October meeting", with its baseline expectation that policy rates will remain unchanged through the rest of FY27.

However, she cautioned that inflation risks remain tilted upwards due to oil prices, weather-related disruptions and the possibility of broader input-cost pressures, which could eventually lead to policy normalisation later in the fiscal year if inflation becomes more persistent.

Aditi Nayar, Chief Economist at ICRA Ltd, said the MPC's decision was widely expected.

"A status quo on the policy rate and stance by the MPC in the August 2026 meeting was a foregone conclusion, given the limited evidence of generalisation of inflationary pressures so far," she said.

Nayar added that the modest revisions to growth and inflation forecasts were appropriate given assumptions of crude oil prices at $80-85 per barrel and a moderate rainfall deficit. "Importantly, the tone of the policy statement was relatively neutral, and does not suggest that rate tightening is imminent," she said.